In college, my room mate and i fermented whatever we could get our hands on and decided to make chocolate liquor with hot cocoa mix....just the smell was enough to make us hurl. Turns out, milk doesn't like to be fermented...which is probably part of your bad flavors since you used nestle morsels.

I just made a chocolate pumpkin porter and added bakers chocolate, which is just solid chocolate liquor, to the secondary. After it settled and conditioned, it was pretty good. (Initial beer prior to bottling was awesome)